The Prime Minister has been promoting “Make in India” during his visits to foreign countries. It is indeed necessary to push our exports in an increasingly globalised world. The question is whether we push for exports of manufactured goods or of services. The difficulties to be faced in increasing the exports of manufactured goods can be seen in the emerging crisis in China. The demand for Chinese goods in the developed countries is stagnating. However, China has continued to make investments in factories in the hope of making increased exports. Stagnant demand in the developed countries along with increasing production in China has led to a glut in the global markets. Chinese factories are closing down. As a result, China was forced to devalue its currency. The highlight here is that China’s crisis is not internal. It is driven by stagnant demand in the developed countries.
Developing countries are trying to sell increasing quantities of their goods in this placid market. As a result they will descend into a price war. India has allowed its rupee to fall in tandem with the Chinese yuan. Currencies of other exporting countries like Vietnam and Philippines are falling too. We are all engaged in a race to the bottom. There will be no winners here. Devaluation of currency by one country will be matched by others. In the end, only the developed countries who are buying these goods will gain. They will get cheap goods both from China and India. But, as said above, the demand from the developed countries is already flat. Therefore, the devaluation of currencies of the developing countries and the consequent reduction in price of these goods for the American consumers will not create much additional demand. A patient in coma does not start eating large quantities of fruits if the price of the fruits declines. Similar is the situation of the developed countries today. Consumers in these countries simply do not have the money to buy goods.
There may still arise a window of opportunity for India in this dismal scenario. Stressed households in the developed countries will look for cheaper substitutes. For example, they may want to buy cheaper textiles instead of designer clothes, ordinary rice instead of basmati, and smaller cars instead of luxury sedans. Our ability lies in providing these “lower” goods at cheap prices. Likewise, corporations will want to reduce their cost of production to stay afloat. This too provides an opportunity for us. Recall that our software exports had not taken a hit in the aftermath of the global crisis of 2008. This happened because American corporations closed down their in-house software development facilities and call centers and started outsourcing them from India in order to reduce costs. The present crisis will see a repeat of the same. Once again, we can gain if we can provide good quality services at cheap prices.
Stressed households in the developed countries will look for cheaper substitutes. Our ability lies in providing these “lower” goods at cheap prices. Likewise, corporations will want to reduce their cost of production to stay afloat. This too provides an opportunity for us.
The problem is that the margin between our cost of production and that of the developed countries is reducing. Wages in the developed countries are moving down; while those in India are moving up. Many software engineers and senior managers in India are nowadays drawing salaries nearly equal to their counterparts in the developed countries. As a result, our “natural advantage” of low wages is being eaten away. Previously we competed with the developed countries on wages alone. A call center being operated from India may have provided the same quality of service as a call center located in the United States. But it was cheaper to establish it in India due to lower wages here. This wage differential has reduced and will continue to reduce as time passes by. Therefore, it will no longer be profitable for the US corporations to establish call centers in India due to wage savings alone. We will have to provide better quality of service at lower prices in order to stay in business. The skill development programme initiated by Prime Minister Modi can turn out to be a game changer here. We may be able to provide better skills at cheaper prices. US corporations will find it profitable to shift their operations to India if they can get the desired quality of workers in India and not in the United States.
The other component of cost is compliance with government regulations. The policies of our government are not favourable in this respect. Export procedures have been made more cumbersome. One exporter from Bengaluru told me that as per new regulations, every export consignment has to be accompanied with a certificate from the Chartered Accountant. Such regulations lead to increased costs of compliance and price out our goods from the global markets. Another businessman from Mumbai was supplying labour to the Gulf countries. He said that his business has virtually come to a standstill because the NDA Government has changed the rules. It is of utmost urgency for the government to simplify procedures and reduce the transaction costs of making exports.
The Prime Minister, however, appears to be singularly focused on increasing exports of manufactured goods under the Make in India campaign. He has simultaneously said that human capital is the biggest strength of Make in India. The skills of our engineers will make it possible to produce goods at cheap prices and we may be able to compete in the global markets. The problem is that the global market for manufactured goods is shrinking. It will be difficult to make a big entry into a collapsing market. On the other hand, the global market for services is expanding. New services are emerging such as customised video games and space travel. Therefore, it will be easier to enter the market of services than that of manufactured goods.
A former secretary to the Government of India contested this view. He said that exports of softwares from India were also reaching a plateau hence there is not much scope in expanding them. On the other hand, he gave the example of a company named Foxconn that manufactures computers and mobile phones for Apple. The company was planning a manufacturing facility in Taiwan which will have dormitory for 90,000 workers. This argument does not stand for two reasons. One, the plateau in exports of software does not mean that there is a plateau in export of all services. In my assessment there are emerging opportunities in exports of new services such as space travel. Secondly, the setting up of a single large manufacturing facility by Foxconn does not mean that the manufacturing market is buoyant. It appears to me that the infatuation of the bureaucracy with manufacturing is rooted in the corruption that is involved there. A manufacturing facility provides many opportunities for making money to the bureaucracy in land acquisition, electricity connection, labour laws, etc. Therefore, we must focus on the export of services under the Make in India campaign.
Author was formerly Professor of Economics at IIM Bengaluru
